IMF: It Ain’t Over Till The Fat Lady Sings

‘It ain’t over till the fat lady sings’. No, I'm not referring to Mrs. Lagarde and no, I don’t want a law suit on my hands. I’m just saying. The expression is commonly used to infer that people shouldn’t be presuming the final outcome of a situation, until we all get there. It’s not because we are nearing the end of quantitative easing and Mr. Bernanke is probably preparing to take flight, as the heavens open and it doesn’t just rain, but it pours on all of us that we should be saying it’s all done and dusted. The International Monetary Fund made an announcement today that they strongly urged the USA not to backtrack too quickly on quantitative easing that has been set up. It also went on to state that repealing budget cuts (sequestration, which is across the board in the USA due to the inability to come to a decision in Congress) as it would be nothing other than damaging to the US economy. The budget cuts known as sequestration began on March 1st 2013 in line with austerity fiscal policies of the USA., bringing about $1.2 trillion in debt reduction (through cuts up to $995 billion and reduction of $228 billion in interest savings).

The International Monetary Fund analysts believe that if budgetary cuts are taken away, then it could trim a substantial slice off economic growth in the US. Forecasts could be lower by as much as 1.75%, meaning that growth prospects would be no better than 1.9% in total for this year. That would drag the US economy down or at least keep it from making good gains that might have shown through in recent weeks with unemployment figures falling. Previously in April, the IMF had estimated economic growth for next year to be at the 3%-mark, but they have also revised that, dropping their estimate to 2.7% for the moment.

The IMF reported that "The deficit reduction in 2013 has been excessively rapid and ill-designed". ‘Hear! Hear!’ some might well retort. Cuts will be made in education and infrastructure spending notably and it’s those areas that might lead to better recovery of the economy in the long-term. Payroll tax cuts that will come to an end will also have a knock-on effect on the economy in adverse terms.

The silver-lining is that the IMF believes that US debt will reach 110% of GDP. It will then be at the peak and will decline after 2015. It’s presently at 101.6% (2012) of GDP. So, we still have more to spend? Or rather we still have more to spend of what we don’t have.

US Debt as Percentage of GDP

US Debt as Percentage of GDP

The other good piece of news is that the IMF urged the Federal Reserve to maintain quantitative easing until at least the end of 2013. That might put investors in a more peaceful state of mind. But, for how long. The end has got to come sometime. But, just not now, maybe, while the economy is still not doing well enough. Delaying it will only perhaps make the market even more difficult when it comes to weaning it off the cash-pile being thrown at them. The way markets have reacted by off-loading bonds and the volatility of the reactions that have taken place over the past few days, means that crossing that bridge will have to be way before the Federal Reserve actually gets to it.

Whatever happens, it looks like the fat lady has indeed sung. But, it’s not over yet. What was it that someone else said? It ain’t over till it’s over. But, then it’ll probably be far too late. So, this time, it’s probably a good thing that we had to sit through the warbling of Ms. Lagarde at the International Monetary Fund. Now, the question is, will the US federal government and Mr. Bernanke take head from the soprano singer over withdrawing both QE4 and budget cuts? Is that the sound of glass breaking?

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